What Will E-Commerce Look Like Post-COVID-19
Opportunities do not always come wrapped in pretty boxes. Amongst many other negative costs, the COVID-19 pandemic has wreaked havoc on businesses and economies worldwide. Yet, in the eye of the storm, eCommerce is flourishing.
Before the pandemic, the eCommerce industry struggled to stay afloat and remain relevant. In only a matter of days, it went from weakness to strength as government-mandated lockdowns forced buyers and sellers to move their businesses and shopping online. Investors are now fuelling the eCommerce sector with capital. There is also an influx of new businesses in the sector. Old brands improved their online retailing competences. New virtual stores were opened. Smaller businesses started to collaborate. Delivery chains were upgraded. Overall, there was a surge in sales across these businesses.
The downside to this influx is the probability of value loss for investors when the pandemic starts to clear out. This is because the business space would have become crowded and when businesses stop to stand out, there is no competition. Hence, they lose value. eCommerce firms like Wayfair and Amazon are currently experiencing this narrative. Their online sales are surging at the expense of their net worth.
The Order Economics of E-Commerce
Profit from the online shopping industry is easy to comprehend with the use of a simple principle that uses seven simple metrics to estimate profits per consumer. A clear knowledge of each of these seven metrics is the secret to the success of a budding eCommerce business.
Along with Metric 2 and 3, the core of an order’s profitability is established by the first three parameters.
The Average Order Value (which is self-explanatory);
Gross Margins (which is the fraction of remaining profit after subtracting the total production cost);
Processing and Fulfilment Net Cost (which consists of the sum of the storage, distribution, delivery, and processing costs).
Life Time Value Multiplier (which is how long a shopper will stay committed to your brand). It is calculated by the customer’s total orders annually.
Customer Acquisition Cost (which is the net amount of money spent by a business on all forms of publicity and adverts to gain and retain customers).
General and Admin Costs, (which is the sum of a business’ fixed costs); and
Total Number of Customers (which is self-explanatory).
COVID-19 and the Future, Past, and Present of the Economics of E-Commerce
Before the Coronavirus pandemic, eCommerce was not lucrative enough to generate steady revenue for many companies. Scaling the ladder or growth was cost-intensive and the poor revenue returns could not sustain the growth of these companies in the sector. High fulfilment costs and pressure from rival brands drastically drove down the margins and upped the customer acquisition cost (CAC) of many companies.
Presently, the reverse is the case as the pandemic is now the reason for exponential growth in the eCommerce sector. Many small and established online businesses have witnessed a remarkable amount of change in their economics, especially sellers of essential goods and services.
Amongst many changes, the following have been the most significant:
As people started shopping online, Average order values (AOV) grew.
Also because of the wave of online shopping, customer numbers spiked and this, in turn, decreased the average fixed costs per consumer.
Life Time Value multipliers rose, as irregular shoppers became more consistent and began to make weekly online purchases.
As large firms cut back on their ad spend, Facebook CPMs and CPCs fell from 70% to 50%, which caused a drop in the cost of customer acquisition.
Preparing For Post-Coronavirus
When things eventually go back to normal, eCommerce will still rule the market. Though the impact of this rule might not be as evident as expected, consumers will be responsible for keeping the demand cycle running.
eCommerce and physical commerce vary because one provides convenience and the other provides experience. Consumers rely on experience, so until the convenient option is as good as the latter, both sectors will always compete. However, the cycle of demand will keep running as long as the eCommerce sector remains profitable. As compared with the present, post-corona might see a drop in the relevance of this sector. This is because:
The Average Order and Life Time Values of products will fall significantly as offline trade swings back into action.
It is predicted that consumers will spend less as offline traders will offer more goods and services for a reduced amount, so they can break even again, thereby lowering the margins in the eCommerce sector.
Large firms will scale up their ad spending thereby spiking the cost of customer acquisition/
The competition will return. There are only so many customers that can patronize a service at a time. Sharing these customers amongst physical commerce and eCommerce will result in fewer orders per platform.
The Predicted Evolution of the E-Commerce Sector
Sellers of essential products will compete so hard that the businesses that cannot keep up will fallout from the market. In the fashion industry (and other specialty retail firms), eCommerce will be an effective trade tool as it will complement the physical commerce sector, giving customers the most convenient experience. This is an example of the possible omnichannel tactics that businesses will adopt after the pandemic.
Similarly, direct-to-consumer (DTC) businesses will thrive online but they have to learn how to build an offline presence for growth in both sectors. Many online businesses will adopt the omnichannel strategy or focus on collaborating with already established offline stores.
E-Commerce and Investment
To identify businesses worthy of investments post-corona, an investor must ensure that the brand has a clear and secure value offer. A profitable business usually defines this by improving its pricing, branding, and distribution of its products and services. A great business is also committed to its old and prospective customers. They have policies in place to offer the best and most convenient services to their client, and a follow-up process even after purchase. This reduces the cost of customer acquisition and drives the life time value of the customers through the roof.
An investor also looks out for the businesses’ growth tactics, financial accountability, and their economy in cost management. This is an important factor in generating high revenue from the business, as well as having the best value to clients in terms of affordability.